EARRINGS UNLIMITED

Cash Budget For the Three Months Ending June 30

April

May

June

Quarter

Cash balance . Add collection from customers Total cash available. Less disbursements : Merchandise purchases Advertising Rent Salaries Commissions (4% of sales) Utilities . Equipment purchases .. Dividends paid .. Total disbursements. Excess (deficiency) of receipts Over disbursements Financing : Borrowing . Repayments . Interest Total Financing . Cash balance , ending .. * $ 170,000x 12%x3/12.. $ 10,000 x 12% x 2/12 Total interest

$ 74,000 436,000 510,000 258,000 200,000 18,000 106,000 26,000 7,000 15,000 630,000 (120,000) 170,000

$ 50,000 695,000 745,000 318,000 200,000 18,000 106,000 40,000 7,000 16,000 705,000 40,000. 10,000

$ 50,000 865,000 915,000 244,000 200,000 18,000 106,000 20,000 7,000 40,000 635,000 280,000

$ 74,000 1,996,000 2,070,000 820,000 600,000 54,000 318,000 86,000 21,000 56,000 15,000 1,970,000 100,000 180,000 (180,000) (5,300) (5,300) $ 94,700

- (180,000) 170,000 $ 50,000 $ 50,000 $ 5,100 200 $ 5,300 (5,300)* $ 97,700 10,000 (185,300)

EARRINGS UNLIMITED
Budgeted Income Statement For the Three Months Ending June 30

Sales revenue (Part 1a.) . Less Variable expenses : Cost of goods sold @ $ 4 per unit . Commissions @ 4% of sales Contribution margin .. Less Fixed expenses : Advertising ($ 200,000x3).. Rent ( $ 18,000x3).. Salaries ($ 106,000x3).. Utilities ($ 7,000 x 3) Insurance ($ 3,000x3) Depreciation ($ 14,000x3) Net operating income . Net interest expenses (Part 2). Net income .. 600,000 54,000 318,000 21,000 9,000 42,000 $ 860,000 86,000

$ 2,150,000

946,000 1,204,000

1,044,000 160,000 5,300 $ 154,700

EARRINGS UNLIMITED
Budgeted Income Statement June 30 Assets

Cash.. Accounts receivable (see below). Inventory (12,000 units @ $ 4 per unit) Prepaid insurance ($ 21,000 - $ 9,000) Property and equipment, net ($ 950,000+$ 56,000 - $ 42,000) Total Assets . Liabilities and Stockholders Equity Accounts payable, purchases (50% x $ 168,000).. Dividends payable Capital stock Retained earnings (see below) .. Total liabilities and stockholders equity .

$ 94,700 500,000 48,000 12,000 964,000 $ 1,618,700 $ 84,000 15,000 800,000 719,700 $ 1,618,7000

Accounts receivable at June 30: 10% x May sales of $ 1,000,000. 80% x June sales of $ 500,000.. Total ... 100,000 400,000 500,000

Retained earnings at June 30: Balance March 31 Add net income (Part 3) Total .. Less dividends declared Balance, June 30. $ 580,000 154,700 734,700 15,000 $ 719,7000

What is Budget? A budget can be defined as a financial plan of an entity relating to a period of time. It involves setting objectives to be achieved and the coordination of people and their organizational aspirations. The financial budget is a way of quantifying the resources needed to achieve these objectives.

Planning process as a function of budget: A major element of financial data activity rests in the act of budgeting. Budgeting is the process of allocating finite resources to the prioritized needs of an organization. In most cases, for a governmental entity, the budget represents the legal authority to spend money. Adoption of a budget in the public sector implies that a set of decisions has been made by the governing board and administrators that culminates in matching a government's resources with the entity's needs. As such, the budget is a product of the planning process. The planning function inherent to any organization, including schools, underscores the importance of sound budgeting practices for the following reasons:
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The type, quantity, and quality of goods and services provided by governments often are not subject to the market forces of supply and demand. Thus, enacting and adhering to the budget establishes restrictions in the absence of a competitive market.

These goods and services provided by governments are generally considered critical to the public interest and welfare.

The scope and diversity of operations in an organization make comprehensive financial planning essential for good decision-making.

The financial planning process is critical to the expression of citizen preferences and is the avenue for reaching consensus among citizens, members of the governing board, and staff on the future direction of the governmental unit's operations.

Controlling process as a function of budget: The conventional concept of control will be expanded as consideration is given to the factors which influence the nature of the responses of employees performing within the sphere of the budgeting process.

The view of the budget as a blueprint for action gives rise to the typical role attributed to it in the controlling function. It is portrayed as a type of yardstick against which performance is measured. An evaluation of this measurement then determines what corrective action is necessary.

Without managements implementing the yardstick qualities of the budget through measurement, the budget is not considered to be useful as a control device. The control process starts after the budget has been adopted. . The representation of the budget as a desired state follows from the fact that it is a management plan designed to provide direction to the entity concerned. Since effective planning requires the existence of entity objectives, it is apparent that the fulfillment of corporate plans will move the enterprise nearer to its over-all goals.

The conventional concept of control is not complete. It is incomplete since it explains control through budgeting as a mechanistic, responsive action without recognizing that it is to some degree a self-governing action. Responding to measured differences between budgeted and actual performances, the corrective actions will always be applied after performances creating the differences have taken place. The corrective actions can in no way control these past activities.

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Reference: The Accounting Review Vol. 41, No. 2, Apr., 1966 The Budgetary Control by Ernest I. Hanson, Assistant professor of commerce, University of Wisconsin

Who needs Budget? Budgeting is all about making sure you are in control, freeing up expenses that can be better used i.e. saving for the really important things in life.

At a high level, budgeting enables you to quantify to what extent income exceed outgoings or outgoings exceed income on a monthly basis. A budget should enable you to take account of

expenses which are not incurred monthly and may therefore be unplanned, i.e. maintenance of house & car, holidays, fuel bills so you can make provision for these.

The next thing you'll want to know is where all your money is being spent, by category i.e. food shopping, petrol, nights out... This will enable you to target those areas which seem unnecessarily high and those you feel confident you can and want to reduce. You can tackle them one by one.

Objectives of Budgeting: Performance evaluation allows citizens and taxpayers to hold policymakers and administrators in governmental organizations accountable for their actions. Because accountability to citizens often is stated explicitly in state laws and state constitutions, it is a cornerstone of budgeting and financial reporting. GASB recognizes the importance of accountability with the following objectives in GASB Concepts Statement 1, Objectives of Financial Reporting, paragraph 77.
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Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services. Financial reporting should demonstrate whether resources were obtained and used in accordance with the entity's legally adopted budget. It should also demonstrate compliance with other finance-related legal or contractual requirements.

Financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity.

Meeting these objectives requires budget preparation that is based on several concepts recognizing accountability. Accountability is often established by incorporating these objectives into legal mandates that require state and local public sector budgets to
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be balanced so that current revenues are sufficient to pay for current services; be prepared in accordance with all applicable federal, state, and local laws; and provide a basis for the evaluation of a government's service efforts, costs, and accomplishments.

Although some form of a balanced budget requirement is generally necessary to ensure longterm fiscal health in any organization, variations such as the use of fund balance reserves to pay for current services may be appropri te over a short period. Generally, however, all a departures from this fundamental objective must be in accordance with applicable state and local laws and policies. Given the importance of demonstrating compliance with the approved budget, the financial reporting system must control the use of financial resources and ensure that budgetary appropriations and allocations are not exceeded. To demonstrate compliance, accounting systems are usually operated on the same basis of accounting used to prepare the approved budget. Thus, the actual financial information captured by the accounting system is in a form comparable to the approved budget. Through budgetary integration, the financial accounting system becomes the primary tool to prove financial accountability. Finally, the budget is evaluated for its effectiveness in attaining the organization's stated goals and objectives. Evaluation typically involves an examination of how funds were expended, the outcomes that resulted from the expenditure of funds, and the degree to which these outcomes achieved the stated objectives. This phase is fundamental in developing the subsequent year's budgetary allocations. In effect, budget preparation not only is an annual exercise to determine the allocation of funds, but also is part of a continuous cycle of planning and evaluation to achieve the stated goals and objectives of the organization.
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Reference: who needs budget?? By Jeremy Hope and Robin Freser Financial Accounting for local and state school systems (Chapter: 3; Budgeting)

Limitations or Disadvantages of Budgeting:

It is difficult, if not impossible, to estimate revenues and expenses in a business enterprise realistically. * It is not realistic to write out and distribute a company's goals, policies and guidelines to all the supervisors. * Budgeting places too great a demand of time on management, especially to revise budgets constantly. Too much paper work is required for budgeting. * Budgeting takes away management flexibility. * Budgeting creates a lot of behavioral problems. * Budgeting adds a level of complexity that is not needed. * Budgeting is too costly, aside from the management of time. * The managers, supervisors and other employees hesitate with budgeting.